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Do You Make $40k/yr? Here's How Much House You Can Afford - YouTube
Channel: Win The House You Love
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Hey, Kyle here with
winthehouseyoulove.com.
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Today, we're talking about, if you
have a salary of $40,000 per year,
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how much house could you afford?
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Now there's an important distinction
to make here: it's how much you
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could, not how much you should.
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So how much could a lender approve
you for as a max purchase price?
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Now in past videos, I've shown
you how to do the math by hand.
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And what I did is actually put
together a Google Sheet for you that's
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going to auto calculate all of this.
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So the download for this
is in the description.
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All you have to do is follow along
with me and I'm gonna show you how
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much you can afford really with any
salary, but we're going to demonstrate
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$40,000 a year, how much you can afford.
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Again, this is could not should.
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So first we need to, when you download
this Google sheet or you copy it
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into your Google Drive, you'll have
to have a Google account to do this.
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What, we first want to do
is put in our gross income.
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All right.
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So I can put in $40,000
as our yearly income.
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Now, why do we use gross?
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Lenders use gross when they're
going to approve you on a loan.
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Now, when you're actually figuring out
how much is a comfortable mortgage payment
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for you, how much you should borrow,
then you're going to want to look at your
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net pay, your take home pay after taxes.
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That's going to help you figure
out what's comfortable for you.
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So this video is not about budgeting.
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This video is about how much a lender
could approve you for it's all based
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on what they're willing to give to you.
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Just because a lender is willing
to give it to you doesn't
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mean you should take it out.
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So we put in our yearly income.
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Now we're going to act like
we're just the only buyer or
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the only borrower on this loan.
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But if you had a co-borrower, so
maybe a spouse or a partner, or even
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a friend, you could put them here
and their yearly income as well.
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So across the top, we can see that
our combined monthly income, so
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$40,000 plus $0 is $3,333 per month.
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Now, again, that's gross.
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Over here, this is going to show us an
approximate of what our take home pay is.
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So assuming 20% in taxes our estimated
take home pay is $2,667 per month.
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All right.
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So after that, what we want to do
is we want to put in our debts.
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So I have 10 slots in here for debts,
which hopefully should be enough
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to cover what you have, but in the
debt section, we want to go ahead
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and start listing out what we have.
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So let's say we have a car payment.
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Let's say the car payment is $350.
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All right.
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Let's also say we have, let's
do, yeah, let's do student loan.
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Let's say our student loan is at $250.
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Okay.
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And let's say maybe those are
the only debts we have, so you
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can see total $600 per month.
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And then up here, we can see
again, total monthly debts between
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both buyers, which is ourself and
no one else is $600 per month.
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So we have $600 a month in debt,
$3,333 in gross monthly income.
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So the first thing a lender is going
to figure out is how much you can
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afford in your max monthly debt.
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All right.
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So, that number is determined
by what's called your max DTI.
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And we'll talk about these numbers here
in a second and how you can adjust them.
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But your max monthly debt is
basically how much a lender is
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willing to let you have in total debt.
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So your total monthly debts plus
your mortgage payment, and then you
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have your estimated housing payment.
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All right.
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So this is the max that a lender
will allow you to have, based
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on your maximum monthly debt and
your total monthly debts as well.
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All right.
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So keep following along with
me, I'll show you how this works
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with the debt to income ratio.
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So based on this scenario, what this
is saying is when we have $600 a
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month in debt, we can afford a max
housing payment of $833 per month.
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And that's actually 32%
of our take home pay.
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So this is going to help you give
you a good idea to see just because a
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lender will approve you for something
doesn't mean you necessarily should
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take it out because 32% is probably
a little bit high as far as using,
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you know, spending that much money,
32% of your take home pay on housing.
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And so, down here, this part of the
calculator is going to break down $833
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into principal and interest, taxes,
insurance, homeowners association, and
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mortgage insurance costs as well for you.
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So you get to break down and see kind of
how these numbers are working together.
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And then it's going to reverse
calculate into an estimated
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max purchase price for you.
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So this is super powerful because
now you can actually begin playing
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with these numbers a little
bit and seeing what's going on.
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So let's see a couple of the
other things that are coming
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together to add this calculation.
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So first we have the down payment.
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So right now we're at 5%.
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Now, if you wanted to increase
your down payment, let's say you
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went from, you went up to 20%.
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Watch our max purchase price change.
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We can see, we actually increased
how much we could purchase because
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we put a higher down payment.
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Now, something else we can do is
change the interest rate, right?
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A 3% interest rate
affords us $132,000 house.
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A 5% interest rate.
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You can see, we drop how much we
can afford by almost $20,000, just
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by our interest rate changing.
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Now, this is a great
segue into our sponsor.
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So really one of the best ways to
figure out a good interest rate for
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you and your family is to shop for
interest rates and, our sponsor,
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Credible, what they do is they're,
they're a loan comparison website.
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And what you can do is go to their
website, fill out a prequalification form.
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And what they'll do is they'll show
you prequalifed rates from different
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lenders so you can compare, which
is going to be the best for you.
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It really only takes a few
minutes, and it's going to not
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affect your credit score at all.
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It's going to be a soft pull, so it's
not going to impact your credit score.
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So if you want to learn more about
what rates you can qualify for you
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can go to the link in the description
to go to Credible's website and
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fill out a prequalification request.
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For full disclosure Credible does pay Win
The House You Love an advertising fee when
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you fill out a prequalification request.
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That's Credible Operations, Inc.
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NMLS 1681276, not available in all States.
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Okay.
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So now that we have our interest rate
figured out we're going to put in 3% here.
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We can then put in our tax rate.
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Now I put in these estimates for taxes
and insurance, and you'll see that the
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tax rate directly affects the taxes and
the insurance rate affects the insurance.
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So for instance, if we wanted to
move up to a 2% tax rate, we can see
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this changes the max purchase price,
because our taxes increased, meaning
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that we could afford less house.
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So if you're not sure what these are
in your area, then you can leave them.
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These are going to be good approximations
for you to just get started.
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The whole idea of this calculator
is to get a ballpark for you.
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Then you can put in yearly HOA, now around
my area, there's really not a ton of
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HOAs, so I put zero, but maybe you have
an HOA that's $500 a year and you can see
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that's going to change again, how much
you can purchase by about $6,000, because
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you increased your monthly payment, oops,
$500, you increased your monthly payment,
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meaning you can afford less house.
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Alright.
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Now you also have mortgage
insurance as an option in here.
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If you hover over, it's going to
show you a little card, if you
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know, what type of loan you're using
and what you can enter in here.
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So if you're putting less than
20% down, a good approximation for
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mortgage insurance is going to be .006.
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And that's going to jump, fill
this cell in right over here.
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You can also put in the years.
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So this is kind of interesting.
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So a 30 year loan, we can afford
$132,000 house, now on a 15 year
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loan keeping the payment the same.
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We can only afford a $94,000 house.
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So it's something to kind of keep
in mind, and can be interesting for
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you to play around with and see how
much you can afford depending on all
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of these different, scenarios here.
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Now the most crucial thing about this
calculator is the debt to income ratio.
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So debt to income ratio is just how
much debt do you have compared by a
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divided by how much income you have?
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So there's actually two ratios.
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The first one is your housing payment.
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How much is your total mortgage
payment divided by your income?
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And the next is your housing payment
plus debt divided by your income.
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So this housing debt to income ratio
is going to be listed in a percentage.
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So a conservative number is 28%.
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That means 28% of your gross pay would
be going towards the housing payment.
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If you want to go moderate,
you can bring that up to 36%.
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If you want to go aggressive,
you can bring that up to 45%.
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Now, as far as the max DTI, again,
this is going to be your total debt.
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So your potential mortgage plus all
of your debts divided by your income.
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So a conservative number here is 36%.
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Moderate is going to be 43%.
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Aggressive is 49% and in my
mind, dangerous gets up to 55%.
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Now a lender actually will approve
you for this amount and I'll show
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you how dangerous this can be.
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So let's run through a
couple scenarios, right?
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So we can see right now with our current,
our current debts that we have, we could
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afford $132,000 house with 5% down.
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Now, again, if you're in a high
cost area, obviously you're
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probably making more than $40,000.
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If you're looking to purchase a home
that is so much more expensive, but for
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instance, in the local market around
here, this is a very common scenario.
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Someone with a $40,000 income
purchasing $132,000 house.
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Okay.
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Let's say we were doing an FHA loan.
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Well, an FHA loan, a lender will actually
approve up to a 55% debt to income ratio.
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And about 36% on the
front end housing ratio.
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And then we'll put in FHA's mortgage
insurance number in here as well.
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So we can see on an FHA program, we
can actually afford quite a bit more,
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than with a more conservative approach.
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Okay.
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Now also what would happen if we paid
off student loans or let's say we just
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didn't have student loans so we can see
nothing changes too much here because
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we've already maxed out our monthly debt.
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Alright.
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So, let's see, move this back and
let's say we're actually going to
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go up to, let's say we're going
to do a conventional loan program.
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Conventional loans normally
have a 49% backend DTI.
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And technically don't have a front
end DTI so we can move this actually
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up to 49% if we wanted to or 45%, if
we're going to be more conservative on
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a conventional program and I'm going
to readjust our mortgage insurance.
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So you can see on a conventional
program, if we had a high credit
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score, you could actually technically
afford up to a $239,000 house
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on a $40,000 per year income.
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All right.
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And what's crazy about this is this
is a 57% of your take home pay, right?
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So you can see this up here in this box.
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57% of your take home pay could
go to a housing payment and a
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lender would approve you for that
amount in certain circumstances,
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if you had a high credit score.
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So you had to be very careful.
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Just because a lender is going
to give you money doesn't
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mean that you should take it.
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So the best thing that you can
do here really is to just start
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playing around with these numbers.
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So you can get a better
feeling for affordability.
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So again, if we put back in these debts
and we said, we had a car payment here,
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student loans, and then let's say we
add a co-borrower on here and I'm going
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to kind of drop this back down to being
something a little bit more reasonable,
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something that might be a little bit
more, a little nicer in our budget here.
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So let's say, we added a co-borrower.
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Let's say they make
$40,000 a year as well.
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All right.
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Maybe, maybe all they have is a
credit card and it's $150 per month.
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So we can see with a co-borrower.
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We now are paying, or we now can afford
up to a $297,000 house with 5% down.
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And that would be 35%
of our take home pay.
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So just to kind of recap, this
is only covering what you could
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get approved for by a lender.
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This is just to give you a ballpark
idea of how these numbers work and
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how these ratios and different things
come into play because right, if you
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want to do a 15 year loan, well, it's
going to change how much you can afford
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by almost $80,000 in purchase price.
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So it's really interesting to be able to
play around with this and see what works.
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Try it out.
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Let me know if you have any questions,
but the calculator is down below for you.
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Okay.
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Again, only take out a loan for
what's going to be comfortable for
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you to pay back in your budget.
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